Edexcel A Level Economics: Theme 2 The UK Economy: performance and policies
Macroeconomic Objectives
Government Policy instruments: used to achieve the Macroeconomic objectives
Monetary Policy
Fiscal Policy Different governments will have different priorities with
Supply-Side Policy their macroeconomic objectives.
Using your own
knowledge and research:
1. Explain whether the
UK is meeting all of
the 7 macroeconomic
objectives listed above.
2. Why is it difficult for
economies to achieve
all the objectives at the
same time?
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Edexcel A Level Economics: Theme 2 The UK Economy: performance and policies
What is macroeconomics?
What is an objective?
What is a Policy?
The UK Government has the following policy objectives.
1. Full Employment
2. Stable prices
3. Economic growth
4. Balance of Payments equilibrium
Other objectives may be
5. income redistribution (equity)
6. concern for the environment
7. sound public finances (balanced budget)
We need to understand the causes, costs and effects of unemployment, inflation, poor growth and
current account disequilibrium.
We also need to understand why the objectives are difficult to achieve simultaneously.
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UK current rate………………………………
Causes or types
Unemployment can be divided into different types
1. Demand deficient or cyclical
This occurs when aggregate demand for goods and services drops and the economy is operating in a
recession (two successive quarters of negative economic growth)
There is too little demand for goods and services and not enough demand for workers
Cure.
The govt can
Clitheroe Royal Grammar School [Link]
Edexcel A Level Economics: Theme 2 The UK Economy: performance and policies
Natural Unemployment
We have seen from our AS curve that after a certain level of output Yfe no more will be produced
and if AD rises prices will simply rise
However, we don’t mean that everybody in the economy is employed. There will still be people
who for a variety of reasons cannot fill the vacancies which exist.
We can identify 2 groups:
a. Frictional or search unemployment
This occurs when people leave jobs and are unemployed whilst they are looking.
b. Structural unemployment
This is caused when the structure of the economy changes and employment in some industries
expands whilst in others it contracts. Workers will have the wrong skills or they are living in the
wrong place. Increasing AD will not reduce this unemployment all that will happen is more
inflation. Here we need to push out AS and retrain workers and improve information about where
jobs are available.
The costs of unemployment. (learn)
A. Costs to the Economy
Unemployment represents a loss of output. The economy is below the PPF. The economy loses all
of the goods and services which it could have had if it was using all its resources. This is inefficient
and a waste of scarce resources.
The income level is below potential.
B. Costs to the govt
1. lost tax revenue
This is a combination of lost income tax, National insurance and lost VAT.
2. Benefits
The govt will find it has to pay out increased benefits. Also it may have to pay out more in health
care, and policing. This can lead to a fiscal deficit.
C. Cost to the unemployed of their lost incomes and the lost skills. People may lose their
homes and their health may suffer.
[Link]
UK current rate………………………….
Causes or types
1. Demand pull
Here AD has risen faster than AS and pushed up the price level.
Clitheroe Royal Grammar School [Link]
Edexcel A Level Economics: Theme 2 The UK Economy: performance and policies
This will occur in a booming economy when AD is increasing faster than capacity
To continue the AD has to keep rising
2. Cost Push
Here the firms have faced an increase in costs and this has caused a decrease in AS.
Rises in costs could be caused by
1. wages being pushed up faster than productivity
2. import prices rising due to a weak pound
The costs of inflation (LEARN)
These are more serious the higher the rate of inflation.
1. Current account deficit/lack of international competitiveness
Inflation will make exports relatively expensive and imports cheaper.
This is likely to
2. Menu Costs
When prices are rising price labels in shops have to be changed. Staff have to be employed to
reprice all goods
Vending machines have to be replaced etc
All of this comprises additional costs to the economy.
3. Redistribution of incomes
Inflation causes a redistribution of income.
It will make some people relatively poorer and others relatively richer.
Eg savers to borrowers.
Inflation eats away at savings but it also reduces the real value of debts.
4. Uncertainty
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Edexcel A Level Economics: Theme 2 The UK Economy: performance and policies
Inflation reduces confidence in the economy and reduces the amount of Investment undertaken by
firms. This can lead to a lower rate of economic growth in the future for the economy
Studies
Look up three costs of deflation
Explain why falling prices may not be a good thing for the economy 15 marks
3. Economic Growth
UK current growth rate………………………
This is an increase in real or potential GDP
(It means the creation of more goods and services).
Economic growth is an objective for the govt as it will bring improvements in the standard of living
(GDP pc)
There are a number of other benefits from economic growth. They are
2.
3.
However Economic growth also has costs
They are
1.
2.
3.
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Edexcel A Level Economics: Theme 2 The UK Economy: performance and policies
4. Balance of Payments
UK current account deficit…………………
The balance of payments records transactions between the UK and the rest of the world.
A large sustained current account deficit [where the value of Imports of goods and services
exceeds the value of exports of goods and services]such as the situation in the UK is a cause for
concern in that it implies a loss of competitiveness and a loss of comparative advantage. There is
also a concern over how to finance such a deficit.
At the moment the UK manages its current account by attracting in capital and investment flows so
that there is a surplus on the financial account. However if the investment flows dried up the UK
would have to think of how to reduce the size of this deficit.
Policy to improve a deficit
1. devaluation/depreciation
2. deflation
3. protection
4. supply side policy
1. Devaluation
this should make our exports cheaper and increase the value bought. It will also make imports more
expensive and reduce the value of Imports.
2. Deflation
This could be through Fiscal Policy and involve
Or Monetary Policy and involve
Both will reduce GDP and incomes so that we buy fewer imports. However
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The UK could now levy tariffs on foreign good to make them more expensive. However this may
not be a good idea because….
4. Supply Side Policy
Policies such as reductions in corporation tax rates
The purpose of this is to reduce costs by increasing productivity and Investment . This will make
UK goods more competitive and increase Exports and reduce Imports.
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Edexcel A Level Economics: Theme 2 The UK Economy: performance and policies
Nb. Countries such as China are running large sustained current account surpluses.
These also cause problems in that they pose an inflationary threat to the Economy. They may need
deflationary policy to deal with this.
[Link] redistribution of income and wealth
The UK govt may also have an objective of improving equity in society. In the UK income and
wealth are not shared out equally. The government may wish to increase equity. This means
making the distribution of income and wealth fairer.
This involves policies to bring about a REDISTRIBUTION of income and wealth.
The policies include
1. taxation
2. govt spending
3. legislation
Taxation
A progressive tax is one where the proportion of income paid in tax rises as the income of the
taxpayer rises.
In the UK we have a progressive income tax system. With 3 tax rates
The purpose of this is to make the final amount of tax paid progressive. VAT is a regressive tax.
Govt Spending
The govt tries to increase incomes of the poor in a variety of ways. Social security involves giving
unemployment benefits, child benefits and pensions. The govt also gives tax credits to increase the
post tax incomes of those on low wages. We can also view the provision of free health care and
education as a way of improving the lives of the poor
Legislation
The govt also has the ability to pass legislation to increase equity in society. Examples of this
include Equal Pay Legislation and the introduction of a Minimum Wage.
However these policies all have drawbacks
1. they lower economic welfare for the rich and they may leave the country
2. Higher taxes may have adverse supply side effects in that they reduce effort
3. Unemployment benefits may encourage idleness
4. minimum wages may cause unemployment
the issue is how much redistribution is the right amount?
[Link] care of the environment.
This is also an objective of the government and they have a range of policies which they can
use. We study these in unit 1 they are for example, taxes on petrol, subsidies for wind farms,
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Edexcel A Level Economics: Theme 2 The UK Economy: performance and policies
regulations on emissions. The difficulties with these policies is they can conflict with other
objectives
Eg.
7. Balanced budget/reducing the fiscal deficit
The UK Government has a fiscal deficit. This is a situation where Government spending
exceeds tax receipts. The Cameron government had an objective of achieving a balanced budget
by 2018. This has now been delayed due to Brexit.
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